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Sort through the wealth of information on the Internet to get what is pertinent to your investmentsMon, 19 Nov 2018 22:00:55 +0000en-UShourly1Aim to maximize your RRSP and TFSAhttps://www.adviceforinvestors.com/news/alternative-investments/aim-to-maximize-your-rrsp-and-tfsa/
https://www.adviceforinvestors.com/news/alternative-investments/aim-to-maximize-your-rrsp-and-tfsa/#commentsWed, 14 Nov 2018 20:00:36 +0000https://www.adviceforinvestors.com/?p=7183It’s best to contribute as much as you can to both your RRSP and your TFSA. But that’s hard to do. The Investment Reporter outlines two strategies to assist you in maximizing your contributions. If you must choose between them, your situation should set your choice.
Ideally, you would maximize contributions to your RRSP (Registered Retirement
]]>It’s best to contribute as much as you can to both your RRSP and your TFSA. But that’s hard to do. The Investment Reporter outlines two strategies to assist you in maximizing your contributions. If you must choose between them, your situation should set your choice.

Ideally, you would maximize contributions to your RRSP (Registered Retirement Savings Plan) and your TFSA (Tax Free Savings Account). But doing so would soak up a lot of your cash.

You can contribute up to 18 per cent of your earned income to your RRSP—less the pension adjustment if you’re lucky enough to work for an employer who pays pensions. In 2018, you can contribute $5,500 to your TFSA. If you have never contributed to a TFSA, you can contribute up to $57,500—if you were at least 18 when the late finance minister, Jim Flaherty, created it in 2009.

Many workers lack the cash to maximize contributions to their RRSPs and TFSAs. Their contribution room grows each year. But if they can’t maximize their contributions in 2018, they’re unlikely to do so in 2019. Here are two strategies to help you contribute more to your RRSP and TFSA.

Two strategies to contribute more

One is to contribute to your RRSP. This will produce an income tax break. You can then contribute your income tax refund to your TFSA.

A second strategy is to raise your cash flow by cutting the tax taken off your paycheques. You then have more cash to contribute. Just fill in form T1213 (Request to Reduce Tax Deductions at Source). The deductions and non-refundable tax credits you can claim include RRSP contributions, child care expenses, support payments, employment costs, carrying charges and interest costs on investment loans, medical costs and charitable donations.

If you earn little income, then a TFSA looks preferable to a RRSP. First, since you pay no or little income tax, the tax break on RRSP contributions will save you little if anything. Second, when you withdraw cash from a RRSP, it counts as income. This could reduce or eliminate benefits from the GIS (Guaranteed Income Supplement) and OAS (Old Age Security). This is also true of withdrawals from a RRIF (Registered Retirement Income Fund). Money withdrawn from a TFSA does not count as income. These withdrawals do not jeopardize means-tested benefits.

If you aim to make large share price gains, then a TFSA looks preferable to a RRSP. That’s because you can sell and reinvest or withdraw the profits tax free. TFSAs are also preferable to RRSPs to save. You can quickly withdraw all the cash.

Can you resist raiding the TFSA pot?

One weakness of TFSAs is they’re too accessible—to buy a house, do renovations, take a trip and so on. It’s human nature to raid the pot. So will people save much for retirement? With RRSPs, few will withdraw cash in their working years. That’s because RRSP withdrawals are taxable and face withholding taxes. RRSPs also offer other benefits that are sometimes overlooked.

One big advantage of an RRSP is that the money can compound for many years, or even decades. That is, you can reinvest returns to generate even more returns. If a TFSA is frequently raided, there won’t be much money left to compound.

A second advantage of an RRSP is that contributions can lead to substantial income tax breaks. This is particularly advantageous for those who earn at lot and pay a high marginal tax rate. If you expect to pay a lower tax rate in retirement than you are in your working years, then an RRSP is even more beneficial. Contributions to a TFSA provide no income tax break, of course.

Buy US dividend stocks in your RRSP

If you plan to invest in dividend-paying American stocks, it’s best to buy them in your RRSP. Thanks to a tax treaty between Canada and the United States, there’s no withholding tax on US dividends paid to RRSPs. But the Internal Revenue Service (the US tax department) will withhold 15 per cent of US dividends paid to TFSAs.

It’s best to maximize your contributions to both your RRSP and TFSA. To come closer to achieving this goal, consider using the two strategies outlined above. If you must choose between a RRSP and a TFSA, take account of your situation. Particularly how much you earn and what tax rate you pay now and expect to pay in retirement.

This is an edited version of an article that was originally published for subscribers in the November 2, 2018, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

]]>https://www.adviceforinvestors.com/news/alternative-investments/aim-to-maximize-your-rrsp-and-tfsa/feed/0Should you rebalance your portfolio?https://www.adviceforinvestors.com/news/investment-strategy/should-you-rebalance-your-portfolio-2/
https://www.adviceforinvestors.com/news/investment-strategy/should-you-rebalance-your-portfolio-2/#commentsTue, 13 Nov 2018 20:00:02 +0000https://www.adviceforinvestors.com/?p=7179Rebalancing an investment portfolio makes intuitive sense. And it serves to take emotion out of the picture. But it also takes judgment out of the picture. And its benefits are less obvious in a declining market.
Should you rebalance your investment portfolio on a regular basis? The answer to this question, in our view, depends on
]]>Rebalancing an investment portfolio makes intuitive sense. And it serves to take emotion out of the picture. But it also takes judgment out of the picture. And its benefits are less obvious in a declining market.

Should you rebalance your investment portfolio on a regular basis? The answer to this question, in our view, depends on how you’ve laid out your financial plan.

Many investment counsellors and financial planners strongly urge their clients to rebalance their portfolios once a year or more often.

By that, they mean sorting your portfolio into categories, and carefully planning the proportion of assets in each category. Categories usually refer to asset classes, such as cash, bonds and stocks—or, of course, the funds that hold these assets.

But rebalancing could refer to each and every individual stock or mutual fund in an asset class too.

The rationale for rebalancing starts by saying if you wanted and started with, say, 40 per cent of your portfolio in bonds and 60 per cent in stocks, but your stocks then doubled in value, the result would be 25 per cent in bonds. So you should sell enough of your stocks (in this case, 20 per cent) and put the proceeds into bonds, bringing bonds back to 40 per cent of the total.

This procedure has the nice effect of selling an asset that has gone up dramatically in value and reinvesting the proceeds in something that has not.

A bear market changes things

But when investors experience markets of a different character, the wisdom of rebalancing seems less clear. If your stocks decrease in value and your bonds remain unchanged, should you sell bonds to buy more stocks?

From a long-term perspective, that would make sense, of course, adding to stocks when they’re low, even if it means selling bonds that have not increased in value.

Unfortunately, that may well interfere with your cash flow if you’re looking at a shorter time frame—say, being retired and drawing income from your portfolio.

We advise a different approach to planning your finances. Rather than make arbitrary allocations by asset class, we suggest getting at least five years of your cash needs lined up in guaranteed investments—bonds, GICs, stripped coupons and so on. And invest so these securities mature when you need the money.

Use bonds for cash flow

If you’re retired, 10 years of cash needs makes more sense. And if you’re many years from retirement or other cash needs, we see no reason to add any low-interest, no-growth securities to your investment portfolio other than cash for emergencies or for buying opportunities that may come up.

If you’re nervous about the volatility inherent in stock investing, of course, you might add guaranteed securities to calm your portfolio.

But if you have several years’ worth of cash requirements taken care of, we advise against arbitrarily rebalancing your portfolio.

What to do with your winners?

Investors who do practise regular rebalancing may do so by rebalancing asset classes or by rebalancing securities within an asset class. In the case of the latter practice, you give up on your winners.

An old stock-market maxim goes: “Cut your losers and let your winners run.” And a highly successful veteran portfolio manager once told us he learned over many years that it’s better to buy rising stocks and sell falling ones. That, of course, runs counter to conventional wisdom.

Rebalancing your portfolio when you have your cash needs well taken care of means selling your winners and adding to your losers. Less an issue with mutual funds than with individual stocks, it calls for more judgment and less adherence to ironclad rules.

As your investment time frame shortens, however, you might redeem winning stocks or equity funds and add to your guaranteed securities, effectively giving yourself a raise after success in equities.

But we don’t recommend arbitrary redemption of winning investments. We strongly urge a more pragmatic approach.

This is an edited version of an article that was originally published for subscribers in the October 19, 2018, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

]]>https://www.adviceforinvestors.com/news/investment-strategy/should-you-rebalance-your-portfolio-2/feed/0Did the ‘October Effect’ affect you?https://www.adviceforinvestors.com/news/investment-strategy/did-the-october-effect-affect-you/
https://www.adviceforinvestors.com/news/investment-strategy/did-the-october-effect-affect-you/#commentsWed, 07 Nov 2018 20:00:00 +0000https://www.adviceforinvestors.com/?p=7161Behavioural financial analyst Ken Norquay points out that October’s gruesome Hallowe’en holiday reminds us that human activity is not always rational. There is no need to lose your money just because the world around you gets weird. Long-term investors should review their investment plan, paying particular attention to their reasons to sell out of the
]]>Behavioural financial analyst Ken Norquay points out that October’s gruesome Hallowe’en holiday reminds us that human activity is not always rational. There is no need to lose your money just because the world around you gets weird. Long-term investors should review their investment plan, paying particular attention to their reasons to sell out of the stock market.

Every October, our society goes through a strange ritual involving the gruesome images of imaginary death presented Hollywood-style, with all the exaggeration and special effects of modern fantasy. How strange! We imagine that we live a sane, logic-based society. Then along comes The Hallowe’en Effect to remind us that we don’t.

As a market psychologist, I continually marvel at the complexities of the human mind. In my stock market book, Beyond The Bull, I describe how “everything’s connected to everything else”. It’s easy to see how true this concept is in the economic world. Interest rates are a lead indicator for the stock market. Inflation leads interest rates. Commodities prices lead inflation. The string of economic causes and effects is endless. But what about this complex thing we call the human mind. What are the causes and effects of our mind’s thought process? Why do we do what we do? Why do we believe what we believe? And why do we revisit the madness of death every October?

Make the story fit

The US stock market high occurred on the autumnal equinox, Sept. 21, 2018 when the S&P500 touched 2,941. It drifted sideways until Oct. 3, when the Dow Jones Industrial Average hit its all-time high at 26,952. Then, on Oct. 10 and 11, the first wave of the long-term decline began. Financial reporters looked about frantically for news about what might have triggered such a sharp decline. They found nothing but old news: trade war tariffs, the renegotiation of US trade agreements, rising interest rates. A few days earlier, China had announced that she was going to be selling another US dollar long-term bond issue. Was this the cover story the media was looking for? If this imaginary media thought process is accurate, you can see how illogical it is. The reason financial reporters scrambled for negative news is that the market went down. The sharp decline sent them scurrying for bad news. The market leads the news. The market causes reporters to look for news that matches the market’s trend.

A few weeks earlier, when the up trend extended its longevity to a new record, reporters told us positive news. A few weeks after that (Oct 10, 11), when the market dropped with breath taking volatility, they reported whatever negative news they could find. This frantic need to find a positive or negative story to match the market does not help individual investors manage their portfolios. It’s just like Hallowe’en. For eleven months of the year, we are aware that our life will end. But when October comes, we acknowledge it with a funny children’s holiday. How strange.

With the awareness that things DO end, let us examine the trends of those financial markets that most effect Canadian investors’ financial future.

October can be very scary

The US stock market averages touched new high levels recently, confirming the record-long bull market that began in March 2009. Then the wild winds of October brought a sharp drop, even as this article was being written. Try to remember what happened in February of this year: the S&P500 dropped 12 per cent from the high to the low! Scary! Hallowe’eny! Then there was October 1929 and October 1987, the months of the two biggest one-day stock market crashes in modern history. Are you scared yet?

(For the record, Hallowe’en plays with the concept of fear of death. Now I’m playing with fear of losing money. Fear is fear: our advice has always been to use reason to make investment decisions, not fear.)

The US market remains in a long-term up-trend, but the extremes of volatility in February and October 2018 are warnings that the up trend is ending. Our guess is that the long-term up-trend ended with the all-time high of the S&P500 on Sept 21, the equinox of 2018. Statistically, the up-trend won’t end until the market drops decisively below the February 2018 low: S&P500 2,533.

The Canadian stock market top occurred on Friday the 13th, July 2018, when the TSX composite hit 16,586. Statistically, the TSX is still in the long-term up-trend that began in March 2009. The July top will be confirmed when the TSX Composite Index drops decisively below last winter’s low, 14,786. (How strange that the longest ever stock market up-trends would feature a trade war.)

US long-term interest rates are in an up-trend, and have been since the summer of 2016. That up-trend was confirmed in the first week of October when 20-year+ yields rose to a new 4-year high. The up-trend has been confirmed by a similar rise in short-term interest rates. It is interesting to watch how China plays her aces in the international poker game of trade negotiations. America is slowly waking up to the fact that her interest rates can be influenced (controlled?) by China. The Chinese sold a large tranche of US dollar-denominated long-term bonds. Their continued selling of US dollar-denominated long-term paper puts continuing upward pressure on long-term US interest rates. No part of this trade war is good for long-term investors.

Canadian long-term interest rates are in lock step harmony with those in the US. The long-term trend is up.

USD in a trendless, sideways drift

The US dollar vs. the basket of non-US currencies is in a trendless, sideways drift. This stability is healthy for the world’s banking system and for international trade. How strange that currency stability would accompany a trade war.

The Canadian Dollar vs the US Dollar has been in a slight up-trend since the oil price crisis several years ago. The long-term trend is UP.

Oil prices touched a new recovery high earlier this month, confirming that the price of energy is also in a long term up trend following the 2014-15 collapse.

Gold is in a trendless, sideways drift following its 2011 to 2015 decline.

Aside from the sharp jolts of the stock market in February and October, the financial markets seem quite stable. This seems strange in light of the trade wars. Don’t economics professors tell their students that import taxes caused the depression of the 1930s? Don’t trade embargoes accompany a political swing to the right as occurred in Europe in the 1930s? Isn’t all this happening now, and doesn’t it portend economic volatility and instability? That’s what happened in the 1930s. How strange that, except for a few jolts in the stock market, it’s not happening now.

Furthermore, this cycle’s unique economic stimuli are also disappearing. Most analysts do not report the economic stimulus associated with energy prices. Cheap oil helps oil consuming countries like the USA, Japan and Europe. The relentless increase in oil prices these past two years are reversing that stimulus.

When the US Federal Reserve Board implemented its ‘Quantum Easing 1, 2 and 3,’ it did so to juice up the US economy after the banking disaster of 2007-10. QE 1, 2 and 3 have been removed, and now China is reversing the effect of QE3 by selling USD long-term bonds.

Wall of Worry

These are the economic goblins walking the streets this October 2018. Optimistic analysts tell us these facts are merely a ‘wall of worry’ and this record long stock market up-trend will continue even longer. And, so far, they have been right.

Strategy: long-term investors should review their investment plan, paying particular attention to their reasons to sell out of the stock market. Be sure not to ‘hold’ through another wealth-destroying bear market as occurred in 2001, 2, 3, and again in 2008, 9. This time, the warning signs are much clearer. When your reason to sell presents itself, hold your cash reserve in short-term interest bearing investments and prepare to buy back the stock market at much lower prices.Short-term traders should investigate ETFs or options that increase in price when the stock market declines.

Reminder: October’s gruesome holiday reminds us that human activity is not always rational. Sometimes we get weird. There is no need to lose your money just because the world around you gets weird. There is no need to squeeze every last dollar out of every long term financial up trend. In the money management business, they talk about ‘the prudent man rule’. They ask: “What would a prudent man do under these circumstances?” Let’s use October’s Hallowe’en as a reminder of the scary, irrational side of investing.

Ken Norquay, CMT, is the author of the book Beyond the Bull, which discusses the impact of your personality on your long-term investments: Behavioural finance.

This is an edited version of an article that was originally published for subscribers in the October 2018/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

]]>https://www.adviceforinvestors.com/news/investment-strategy/did-the-october-effect-affect-you/feed/0Here’s a way to play rising interest rateshttps://www.adviceforinvestors.com/news/exchange-traded-funds/heres-a-way-to-play-rising-interest-rates-2/
https://www.adviceforinvestors.com/news/exchange-traded-funds/heres-a-way-to-play-rising-interest-rates-2/#commentsMon, 05 Nov 2018 20:00:25 +0000https://www.adviceforinvestors.com/?p=7154Floating-rate bonds and floating-rate bond ETFs offer you a way to protect your fixed-income portfolio from rising interest rates.
In view of rising interest rates, we’ve advised you to shorten the average term to maturity of your bond holdings, and more importantly, their duration, by trading into high-coupon, short-term maturities. Another way to limit the damage
]]>Floating-rate bonds and floating-rate bond ETFs offer you a way to protect your fixed-income portfolio from rising interest rates.

In view of rising interest rates, we’ve advised you to shorten the average term to maturity of your bond holdings, and more importantly, their duration, by trading into high-coupon, short-term maturities. Another way to limit the damage from rising rates on your fixed-income portfolio is to buy floating-rate bonds.

Floating-rate bonds vary their interest payments to match changes in interest rates. Typically, the interest paid is tied to the rate of a money-market benchmark such as the London Interbank Offered Rate (LIBOR) or the prime rate.

This makes them relatively attractive holdings when interest rates rise. That’s because their increasing interest payments help protect their market value, or their price. Fixed-rate bonds, on the other hand, lose their market value when rates rise because their price must fall to offer buyers a more competitive return on their investment.

But while floating-rate bonds (floaters) are attractive to hold when rates rise, they typically underperform their fixed-rate cousins when rates fall or remain flat.

Another drawback of floaters is credit risk. This is particularly the case when you invest in junk bonds. In the bear market of 2008, the BMO Floating Rate Income Fund lost 48 per cent of its value as high-yield bonds collapsed.

Conservative floating rate bond ETFs

Yet you can find more conservative alternatives. Among exchange-traded funds (ETFs), for example, there is iShares Floating Rate Index ETF (TSX—XFR). This ETF seeks to provide income while limiting rate risk by trying to track the performance of the FTSE TMX Canada FRN (floating-rate notes) Index, less expenses.

The portfolio is conservative. More than 90 per cent of its assets are invested in federal and provincial government bonds. The rest is mostly invested in Canada’s big banks. Credit quality, therefore, is high. Just over 98 per cent of the portfolio has credit ratings of A or higher. Nearly 65 per cent of its assets carry the highest rating—AAA.

The ETF’s weighted average yield to maturity is 1.9 per cent. This is lower than the 2.4-per-cent yield of the Vanguard Short-Term Bond Index ETF (TSX—VSB), which we recommend and regard as a core ETF bond holding in a fixed-income portfolio. Floaters typically have lower yields than fixed-rate bonds.

But despite its lower yield, iShares Floating Rate ETF has outperformed Vanguard Short-Term Bond over the past year, which was a period of rising rates. iShares delivered a total return of 1.7 per cent, while Vanguard’s return was just 0.1 per cent.

The iShares ETF’s management expense ratio (MER) is 0.23 per cent. It’s a relatively conservative buy for income and capital preservation in a rising-interest rate environment.

Investors who are willing to take on more risk might consider Horizons Active Floating Rate Bond ETF (TSX—HFR). This ETF invests in corporate issues and about 99 per cent of its portfolio is rated BBB or higher. Its MER is 0.46 per cent and its yield to maturity is 2.73 per cent. It’s a buy if you can accept higher risk.

Advantages of ETFs

Exchange-traded funds (ETFs), such as the ones recommended above, are investment vehicles constructed like a mutual fund but trade like an individual security on a stock exchange. Usually designed to mimic a certain market index, they can provide you with several benefits over a traditional, managed mutual fund.

First, ETFs offer you greater transparency, as their exact holdings are disclosed on a daily basis. This lets you know precisely what you own and what you’re paying for.

Second, they offer you the flexibility to trade them at any time when the exchange is open. You can even use such fancy trading features as market limit and stop orders. Keep in mind, though, when you buy and sell them, whether through a financial advisor or brokerage account, you’ll have to pay commissions most of the time. Note that some discount brokers waive the commissions on certain ETFs.

Third, ETFs that track an index are usually more tax efficient than managed funds, or managed ETFs for that matter, since they typically have lower portfolio turnover.

This is an edited version of an article that was originally published for subscribers in the September 14, 2018, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

]]>https://www.adviceforinvestors.com/news/exchange-traded-funds/heres-a-way-to-play-rising-interest-rates-2/feed/02 best ETFs to buy right nowhttps://www.adviceforinvestors.com/news/tech-stocks/2-best-etfs-to-buy-right-now/
https://www.adviceforinvestors.com/news/tech-stocks/2-best-etfs-to-buy-right-now/#commentsSun, 28 Oct 2018 19:00:47 +0000https://www.adviceforinvestors.com/?p=7130The peak six months of market activity has arrived, and seasonal investing analyst and portfolio manager Brooke Thackray picks the two sectors—and names two specific ETFs—that he’s targeting to rotate funds into.
If you are searching for a rewarding relationship (to yourself, if not necessarily to each other), go no further than the ‘odd couple’ of
]]>The peak six months of market activity has arrived, and seasonal investing analyst and portfolio manager Brooke Thackray picks the two sectors—and names two specific ETFs—that he’s targeting to rotate funds into.

If you are searching for a rewarding relationship (to yourself, if not necessarily to each other), go no further than the ‘odd couple’ of consumer staples and technology stocks in October. So says Brooke Thackray, a Toronto seasonality-based financial analyst and author of an annual eponymous book series, Thackray’s Investor’s Guide, coming out in late November.

Despite the myriad differences between the two sectors, including their reasons for drawing market interest, both are historically strong in October, making them a perfect match for a seasonal investor’s portfolio, he explains.

As the peak six months of market activity approaches, the analyst is preparing to rotate HAC’s holdings. (The market’s top-performing period typically begins around Oct. 28 and lasts until May 5, based on historical data.)

“Right now, we have a lot of cash on hand that we’re starting to put to work but we’re expecting to be substantially more invested by the end of October,” says Mr. Thackray.

Commenting on consumer staples, the analyst notes that the sector in the United States had underperformed the S&P 500 through the first half of 2018. However, in June, the sector began to turn around. Since July, it has slightly outperformed the S&P 500.

In anticipation of volatility from summer into October, “investors themselves are looking for companies that are more defensive. For us, this is a good setup. It’s a good sector to be in at this time when the market is trying to figure out what to do,” says the analyst.

Market leader just reaching its peak period

As for Mr. Thackray’s case for the technology sector, he points out: “It’s been a market leader for a while . . . and here we are coming up to its really strong seasonal period.”

Technology stocks tend to do best from Oct. 10 or so through the end of November. Many businesses examine IT-related purchases at the end of the year, to say nothing of consumer interest leading up to Christmas. “The idea is to be out on technology when there’s a lot of excitement.”

Mr. Thackray advises investors to avoid energy stocks in the fall since they generally perform poorly at this time, particularly oil stocks. In fact, because of the energy sector’s prominence in the Canadian stock markets, the analyst recommends avoiding Canadian investment altogether over the autumn months.

“Nobody’s picking on Canada,” he says, but he gives little weight to speculation that oil prices could reach US$100 a barrel, and buoy up the local economy, because of sanctions on Iran.

The conclusion of North American Free Trade Agreement negotiations and the emergence of its successor, the United States-Mexico-Canada Agreement, on Oct. 1 are unlikely to spur domestic capital markets or the economy, Mr. Thackray adds.

“So far the stock market hasn’t reacted with enthusiasm. I don’t expect any change at all actually.” He says the new agreement’s terms are less favourable for Canada than the previous one. “The deal doesn’t help the stock market other than providing some clarity on capital spending.” Lower uncertainty may result in the Bank of Canada raising interest rates, which would further dampen stock market growth, the analyst argues.

2 best ETFs to buy right now

Mr. Thackray says: “The funds I work with, we generally buy sectors of the market, so we buy ETFs.” Accordingly, he names the SPDR Consumer Staples Select Sector Fund (NYSEARCA—XLP) and the SPDR Technology Select Sector Fund (NYSEARCA—XLK) as his ‘best buy’ picks for US exposure.

However, Mr. Thackray stresses: “The technology trade would be longer, but in this case, it would only be for the month of October.” The technology SPDR’s assets are also made up of major firms like Microsoft Corp., Apple Inc., Intel Corp., and Cisco Systems Inc.

Mr. Thackray says: “We’ve seen rapid outperformance over the last couple of years. Technology stocks have outperformed outside of their seasonal period as we’ve had a structural change to the marketplace.”

Since June, the sector has settled down somewhat and performed in line with the broader market. “It’s an expensive sector, but it’s the leading sector of the market,” says the analyst. XLK offers a 1.27 per cent dividend yield.

]]>https://www.adviceforinvestors.com/news/tech-stocks/2-best-etfs-to-buy-right-now/feed/0Low-cost stocks keep on winninghttps://www.adviceforinvestors.com/news/investment-strategy/low-cost-stocks-keep-on-winning/
https://www.adviceforinvestors.com/news/investment-strategy/low-cost-stocks-keep-on-winning/#commentsWed, 24 Oct 2018 19:00:28 +0000https://www.adviceforinvestors.com/?p=7118The ‘Dogs of the Dow’ strategy involves the 10 stocks of the Dow Jones Industrial Average with the lowest price-to-earnings ratios. These low-cost stocks subsequently beat both the overall Dow and the 10 Dow stocks with the highest price-to-earnings ratios.
When an investment strategy succeeds, it attracts followers. The trouble is, if too many investors use
]]>The ‘Dogs of the Dow’ strategy involves the 10 stocks of the Dow Jones Industrial Average with the lowest price-to-earnings ratios. These low-cost stocks subsequently beat both the overall Dow and the 10 Dow stocks with the highest price-to-earnings ratios.

When an investment strategy succeeds, it attracts followers. The trouble is, if too many investors use the same strategy, it often stops working.

The ‘Dogs of the Dow’ still works

One exception is the ‘Dogs of the Dow’. Under this rule, you buy the 10 dogs of the Dow Jones Industrial Average, or DJIA. Stocks that are derogatorily referred to as ‘dogs’ are those that have dropped in price. But their former underperformance also means that these stocks are cheap. In the subsequent year, they typically beat the other 20 stocks of the DJIA and, in particular, the 10 costliest stocks. After all, the costliest stocks already had lofty earnings expectations built into their share prices. When they eventually fell short of these expectations, the market punished them and made them part of the latest group of dogs.

In The Globe & Mail, Norman Rothery has referred to the results found by James O’Shaughnessy, the author of the book What Works on Wall Street. Mr. O’Shaughnessy grouped the 30 DJIA stocks into one of three groups based upon their P/E (Price-to-Earnings) ratios. He examined the period from June 30, 1937, through June 30, 2004.

Buy top-quality stocks with low P/Es

During this 67-year period, the 10 Dow stocks with the lowest P/E ratios advanced at an average yearly rate of 9.2 per cent. This was well ahead of the seven per cent average yearly rate of the overall Dow. The 10 stocks with the highest P/E ratios inched up at an average yearly rate of only 3.2 per cent. Mr. Rothery’s research shows that this strategy continued to work up to 2017.

Based on this evidence, you should buy the 10 Dow stocks with the lowest P/E ratios at the end of each year. Sell any that now have a P/E ratio above the bottom 10 stocks. This strategy should pay off over time.

The ‘Dogs of the Dow’ strategy provides you with another benefit worth keeping in mind. Most stocks with low P/E ratios are that way because their share price has fallen. Low share prices raise the yield of dividends. That is, you stand to earn more cash as well as superior share price gains.

Following this strategy will lead to some trading costs, of course. But brokerage fees have plunged over the years, particularly at discount brokerage firms that trade online. In addition, the DJIA stocks are among the most heavily-trades stocks. This liquidity significantly narrows their bid-ask spreads (the gap between the most a potential buyer will pay and the least a potential seller will accept). Low trading costs make the higher returns on the strategy even better.

Your dogs need to survive

Buying the dogs of other indices may not work as well. After all, some companies go bankrupt. And before they do, they often trade at low P/E ratios. The 30 stocks that make up the DJIA are much larger than most. This reduces their chances of going bust. Also, they’re more apt to receive bailouts. Remember, ‘too-big-to-fail’ car manufacturers and foreign banks receive bailouts from national governments. Small companies have to fend for themselves.

Stock market observers other than Mr. O’Shaughnessy and Mr. Rothery have noticed the successful strategy outlined above. One was Benjamin Graham, the father of fundamental stock analysis. Another was Michael O’Higgins who seems to have coined the term ‘Dogs of the Dow’.

Ignore this criticism of the strategy

Writing in Forbes recently, John Tobey criticized the strategy. He said that most practitioners weight the stocks equally. The DJIA, by contrast, uses price weighting. But equal weighting seems to work. Mr. Tobey said that in 2013, under the price weighting method, the “Dogs would have returned less, rather than more”.

We should expect the ‘Dogs of the Dow’ strategy to eventually become less effective as its success becomes better known. But since the strategy has succeeded decade after decade, you might profit from buying the 10 DJIA stocks with the lowest P/E ratios.

This is an edited version of an article that was originally published for subscribers in the October 5, 2018, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

]]>https://www.adviceforinvestors.com/news/investment-strategy/low-cost-stocks-keep-on-winning/feed/0Don’t let your stop loss order backfire on youhttps://www.adviceforinvestors.com/news/investment-strategy/dont-let-your-stop-loss-order-backfire-on-you/
https://www.adviceforinvestors.com/news/investment-strategy/dont-let-your-stop-loss-order-backfire-on-you/#commentsWed, 17 Oct 2018 19:00:24 +0000https://www.adviceforinvestors.com/?p=7095Portfolio manager Keith Richards of ValueTrend Wealth Management warns of the traps set by pros that often catch less experienced investors using stop loss orders. Keith offers a rule-of-thumb to keep you in control so you won’t sell at a sudden steep price drop only to watch the stock rise again.
I am frequently asked whether
]]>Portfolio manager Keith Richards of ValueTrend Wealth Management warns of the traps set by pros that often catch less experienced investors using stop loss orders. Keith offers a rule-of-thumb to keep you in control so you won’t sell at a sudden steep price drop only to watch the stock rise again.

I am frequently asked whether we at ValueTrend use ‘stop loss orders’ to limit our downside on a trade gone badly. After all, the tagline for ValueTrend Wealth Management is: “Limit your risk. Keep your money.” You’d think that we’d be all over the concept of preventing losses by using stops, wouldn’t you?

In theory, setting a stop loss on a stock should work to reduce losses. Let’s say you buy a stock at $10 and have a stop loss order sit just under your price. And let’s say you want to contain your loss to 10 per cent. So you enter the stop loss order to trigger at $9, which theoretically limits your loss to 10 per cent. After all, the trader or the computer has to immediately trigger a sell on the stock if, as and when the stock hits $9. If it stays above $9 you keep the stock, and hopefully realize its ultimate upside. A perfect world!

Not so fast! I’m going to condense 30 years of trading stocks professionally into one succinct discussion on why I don’t use stop losses. I’ve used them in the past, and learned some valuable lessons. Here is why I’ve learned not to use stop loss orders:

There is volatility!

Fact is, stocks gap down for negative breaking news, lousy earnings reports, false news, rumours, computerized trading, institutional selling and many other reasons. Let’s say such a news event hits your stock. Suddenly, your stop loss is triggered. But it won’t necessarily be sold at your $9 stop price. Instead, it will be triggered at the next available market price. In a fast moving market, you will often see your stock sold into a knee-jerk overreaction to the news. A few days later, the stock is back to your old price. But you aren’t in it any longer.

To put it bluntly, your stock will very often be automatically sold at the lowest price in such situations. Instead of limiting your loss to 10 per cent, it may be substantially more. And, you may regret the sale later.

Let’s look at a stop loss failure that might have happened to a short-term trader on Blackberry (TSX—BB; NYSE—BB) this past summer. (Yeah, I know—most of us trade a bit longer termed than this example, but let’s just use this for easy illustration.) The stop was set at $13.00 having been bought at $13.80 on a breakout. It triggered with a rapid markdown finishing the day at $12.50—but I assume the trader got out a dime over that at $12.60. Three weeks later, with the stock on its way back to over $14, the trader was found in a bar, drinking heavily. There are hundreds of such failed examples of computer-entered stops you will spot on charts.

But wait, there’s more….

The dark side of the force

Did you know that when you place a stop loss order, that order is transparent? Market-makers on the stock see your order and often ‘run the stops’. This occurs when the stock is forced low enough to trigger a large cluster of stop loss orders. Market makers, and other professionals, know that round numbers or obvious support levels are popular with amateurs using stop loss orders. Computers recognize these retail stop loss patterns and can execute in a heartbeat. Your stock gets popped out with the rest of the less informed investors holding stops at this well-represented, stop-price. Then, the stock reverses direction and rallies.

Humans still matter

Stop losses are like self-driving cars. Yes, they are convenient, but you are relying on a machine to look after you. Seems that Google and Uber have discovered that auto-pilot technology is great . . . EXCEPT at busy intersections with jaywalking passengers, complex traffic patterns, bicycle traffic, etc. Yup—humans can out-drive a robot in these conditions. Similarly, stop losses seem like a good idea . . . until the above situations occur, and human judgment would have prevented trading losses.

Technical analysis allows us to set mental stop losses. By using my ‘3 bar rule’ per my book Sideways—you will hold the stock for at least 3 days after a support level is breached (or 3 weeks if you have a longer horizon). You are in control. No pro trader is taking advantage of you. No whipsaw news item will sell you out at a deep loss—only to watch the stock rise again.

Keith Richards, CMT, CIM, FCSI. Keith has been in the securities industry since 1990. As portfolio manager and founder of ValueTrend Wealth Management, he manages $150 million in assets and runs a discretionary investment service for high-net-worth clients. ValueTrend Wealth Management was recently selected to receive the 2019 Canadian Business Excellence Award for Private Businesses—having received it in 2017 as well. Mr. Richards’ articles and interviews appear regularly in Investors Digest of Canada, The MoneyLetter, Canadian MoneySaver, The Globe and Mail and the Toronto Star newspapers. His appearances on Bloomberg/BNN Television have inspired producers to acknowledge him as “one of [our] most accurate technical analysts”. Mr. Richards’ books, SmartBounce: 3 Action Steps to Portfolio Recovery and Sideways: Using the Power of Technical Analysis to Profit in Uncertain Times, are available in bookstores.

This is an edited version of an article that was originally published for subscribers in the September 2018/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

]]>https://www.adviceforinvestors.com/news/investment-strategy/dont-let-your-stop-loss-order-backfire-on-you/feed/0Give your investment portfolio a big KISShttps://www.adviceforinvestors.com/news/exchange-traded-funds/give-your-investment-portfolio-a-big-kiss/
https://www.adviceforinvestors.com/news/exchange-traded-funds/give-your-investment-portfolio-a-big-kiss/#commentsTue, 16 Oct 2018 19:00:55 +0000https://www.adviceforinvestors.com/?p=7086KISS is an acronym for Keep It Simple, Stupid, a design principle first promulgated by the US Navy in 1960. The KISS principle states that most systems work best if they are kept simple rather than made complicated. So, to avoid kissing your money goodbye, you should also adopt this sound principle for building a
]]>KISS is an acronym for Keep It Simple, Stupid, a design principle first promulgated by the US Navy in 1960. The KISS principle states that most systems work best if they are kept simple rather than made complicated. So, to avoid kissing your money goodbye, you should also adopt this sound principle for building a profitable portfolio.

To individual investors who want to direct their own finances but lack the knowledge and expertise of the pros, author and retired investment banker Larry Bates urges them to keep things simple.

“I don’t have any really short-term views on the market other than the perspective that one should not be surprised by volatility at any time. Real investing is long-term ownership of businesses through the stock market, not timing the market. Three or four ETFs can give the average investor all the exposure they need.”

Mr. Bates entered Canada’s finance industry in the early 1980s, when the jargon of the day described it as made up of ‘four pillars’, namely banks, stock brokerages, insurance companies and trust companies. As it turned out, his first four jobs brought him to each type of institution. “I had a great early schooling across the spectrum of the financial industry,” he says.

At RBC Capital Markets, he worked in fixed-income and bond markets for 23 years, until 2010. Mr. Bates then moved to the Bank of Nova Scotia before leaving the banking industry in 2015. Since his departure, he has worked as a consultant and wrote Beat the Bank: The Canadian Guide to Simply Successful Investing, released on Sept. 15 online and in bookstores. He is also a member of the Ontario Securities Commission’s investment advisory panel.

Beat the Bank written for retail investors

Although Mr. Bates dealt with large, sophisticated institutional investors in Canada and abroad rather than personal clients throughout his lengthy career, his new book addresses the concerns of average retail investors.

The author says he wrote Beat the Bank with two goals in mind.

Firstly, “The book is meant to be a bit of a wake-up call,” drawing attention to the inefficiency of the Canadian mutual fund industry. “There’s nothing wrong with mutual funds in principle,” says Mr. Bates. However, he adds, almost all charge “outrageous fees” that eat away a high proportion of gains, especially when compounded over time. Mr. Bates further criticizes the financial sector for not clearly explaining mutual fund management costs.

“Bay Street never presents the bill. They never tell the clients what the impact of the fees are, because they’re devastating. The five million Canadian investors out there are just blind to it.”

Secondly, the book provides average investors with sufficient understanding of the market to give them the confidence to make the change to lower-cost investments, become informed consumers, and make better choices for themselves and their families, Mr. Bates says. “It can be very simple and . . . this sort of decodes the mystery of investing so investors can keep more of their money.”

Index-based ETFs keep costs down

Mr. Bates urges average investors to avoid buying mutual funds in favour of index-based, exchange-traded funds within a self-directed brokerage account, thereby keeping costs minimal and gains compounding while maintaining diversification. “Robo-advisors are a great alternative as well,” he says.

Investors should be conscious of when they plan to cash in (the longer the wait, the more volatility is acceptable, and a dive of 20 per cent to 30 per cent is normal) and need to build resistance to stock setbacks with bond ETFs, according to Mr. Bates. Their personal risk tolerance is also key to answering “the critical portfolio composition question,” he adds. “It’s critical, with the asset allocation between fixed-income and stocks, that the investor can carry through volatile markets, ugly markets, without panicking and selling.”

Early this year, ETF provider Vanguard issued several “one-stop ETFs for retail investors” made up of different strategic asset allocations and among Mr. Bates’ ‘best buys’: the Vanguard Balanced Portfolio ETF (TSX—VBAL), Vanguard Conservative Portfolio ETF (TSX—VCNS), and Vanguard Growth Portfolio ETF (TSX—VGRO). (The balanced portfolio is 60 per cent equity and 40 per cent fixed-income investments. The conservative portfolio pushes fixed-income to 60 per cent while the growth portfolio increases equities to 80 per cent.) “They’re great products and I expect we’ll see more of those to come,” says Mr. Bates. Each ETF is made up of an all-encompassing mix of US and Canadian stocks and bonds, as well as assets outside North America. At the same time, all boast a management expense ratio of just 0.22 per cent.

Despite his enthusiasm for Vanguard’s new asset allocation ETFs, Mr. Bates says of other issuers such as BlackRock and the Bank of Montreal: “All of them have groups of ETFs that you can build a total portfolio from. As long as they’re from a trustworthy major institution, I think they’re going to be fine.”

Bullish on long-term North American growth generally, Mr. Bates says the future of Canadian banking is a particular bright spot, ironically because of the same protections and market dominance that allows banks to charge clients excessively. The best revenge? “Be the banker,” he says, and buy ETFs made up of bank stocks.

]]>https://www.adviceforinvestors.com/news/exchange-traded-funds/give-your-investment-portfolio-a-big-kiss/feed/0How to reduce your portfolio riskhttps://www.adviceforinvestors.com/news/investment-strategy/how-to-reduce-your-portfolio-risk/
https://www.adviceforinvestors.com/news/investment-strategy/how-to-reduce-your-portfolio-risk/#commentsSun, 14 Oct 2018 18:58:44 +0000https://www.adviceforinvestors.com/?p=7077Everyone knows that successful investing entails taking calculated risks. The trick is to minimize those risks while maximizing your potential profits. You can do this better if you understand the risks—and plan your portfolio accordingly.
In recent years investing has become riskier. That’s due to the increasing volatility of financial markets, less predictable international trade policies
]]>Everyone knows that successful investing entails taking calculated risks. The trick is to minimize those risks while maximizing your potential profits. You can do this better if you understand the risks—and plan your portfolio accordingly.

In recent years investing has become riskier. That’s due to the increasing volatility of financial markets, less predictable international trade policies and international competition, among others.

Today’s investors have to be more flexible as a result. They need to adapt quickly to changes in financial markets and the economy. They also have to understand the risks they face.

Basically, investors in common shares face two broad categories of risk: company-specific risks and extraneous risks. Company-specific risks refer to anything about a particular company—its structure or policies, for instance—that may affect its suitability as an investment.

Extraneous risks are external factors—currency exchange rates, tariffs or economic growth and contraction, for example—that may affect many companies simultaneously. They’re things that individual companies have no direct control over.

3 types of company-specific risks

You can split company-specific risks into three sub-categories. One is asset risk. That is, the smaller a company is, the more vulnerable it is to business uncertainties. Larger companies are better able to survive setback in most cases.

Take, for instance, Quebecor Inc., one of our Key stocks. Its acquisition of Vidéotron was largely seen as overpriced. That could have spelled disaster for a company of much lesser size. But for Quebecor, it only meant write-downs that depressed its financial results temporarily.

Price risk is a second sub-category of company-specific risk. That is, a stock becomes riskier the higher its share price rises. This is especially true if it trades at a very high multiple to its expected earnings or far above the book value of its assets. Then any negative shift in investor confidence could send its price plunging.

Predictability risk is a third sub-category of company-specific risk. This includes anything about a company that might affect the reliability or regularity of its revenues, earnings or dividends. Many factors could change any of these, including the types of products a company sells, whether or not it introduces new products, whether or not it prices its products competitively, the stability of its markets, the amount of debt it owes, its susceptibility to lawsuits and so on.

Extraneous risks can be unpredictable

Extraneous risks are also of many kinds. These include natural disasters such as forest fires in British Columbia and the North, the floods that hit Alberta and Ontario, Hurricane Sandy, ice-storms in Eastern Canada, diseases (such as Ebola, among others), terrorism or wars and so on.

Among the more significant of these risks, however, are those of an economic nature. These include economic or industry cycles, changes in interest rates, trade tariffs, currency fluctuations, inflation rates and so on. And, or course, you compound your risk if you buy shares on margin.

Take these steps to reduce your risk

There are things you can do to reduce your risk, however. To lessen asset risk, you can aim high by concentrating your investments in better quality stocks—particularly our Key stocks that we rate ‘Very Conservative’ or ‘Conservative’. You can reduce price risk by becoming more and more cautious about the stocks you buy as prices rise—save boldness for the beginning of a rising trend in prices.

You can reduce predictability risks as well as most extraneous risks by remembering to balance and diversify your portfolio.

Diversify geographically, for instance, and you lessen your exposure to natural disasters. Diversify between, say, utilities and debt-free suppliers of consumer staples and you protect yourself from undue dependence on interest rate levels. Diversify between exporters and companies focused on the domestic economy and you reduce your exposure to trade tariffs and exchange rates. In short, doing this means your success won’t depend too heavily on the fortunes of any one stock or industry group.

This is an edited version of an article that was originally published for subscribers in the September 7, 2018, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

]]>https://www.adviceforinvestors.com/news/investment-strategy/how-to-reduce-your-portfolio-risk/feed/014 investment mistakes to avoidhttps://www.adviceforinvestors.com/news/investment-strategy/14-investment-mistakes-to-avoid/
https://www.adviceforinvestors.com/news/investment-strategy/14-investment-mistakes-to-avoid/#commentsTue, 09 Oct 2018 18:58:55 +0000https://www.adviceforinvestors.com/?p=7062Many investors repeat the same mistakes. Self-awareness may help you recognize them in your own investing and make a conscious effort to avoid them. Or else you may have to learn the hard way by repeating your mistakes over and over until, as Meredith in Grey’s Anatomy said: “Why do I keep hitting myself with
]]>Many investors repeat the same mistakes. Self-awareness may help you recognize them in your own investing and make a conscious effort to avoid them. Or else you may have to learn the hard way by repeating your mistakes over and over until, as Meredith in Grey’s Anatomy said: “Why do I keep hitting myself with a hammer? Because it feels so good when I stop.”

1. Investment objective: A failure to set investment objectives, or setting unsuitable objectives.

2. Overtrading: It’s hard to overcome brokerage fees, bid-ask spreads and capital gains taxes if you’re skillful or lucky enough to have any. The bid-ask spread (the difference between the most a potential buyer bids and the least a potential seller asks) is often overlooked. Just remember that market-makers earn a living by exploiting the bid-ask spread.

It’s best to gradually buy high-quality, dividend-paying stocks you’re willing to own indefinitely. As billionaire Warren Buffett quipped: “Our favorite holding period is forever.” One way to assess whether you’re overtrading or not is to look at your portfolio turnover ratio. A turnover ratio of 0.2 is right for many successful investors. This means that you hold your stocks for an average of five years or more. A ratio of 1.0 or more is clearly excessive. Holding your stocks for a year or less doesn’t give the time they need to build their businesses. On the other hand, you shouldn’t keep poor investments simply to hold down your portfolio turnover ratio.

3. Lack of Diversification: It pays to balance your portfolio across and within our five economic sectors—finance, utilities, consumer products and services, manufacturing and resources. They all have days in the sun and in the ‘doghouse’. To diversify within utilities, you could buy one electricity stock, one pipeline and one telecommunications stock.

It also pays to diversify geographically. Over the past decade, American stocks beat most others—Canadian stocks, European stocks and emerging markets stocks. But at some point, American stocks will underperform their international peers. Also, diversifying geographically can cut your risk from extreme weather, extreme regulation, war and so on.

4. Over-diversification: While diversification makes sense, some carry it too far. If you own too many stocks (over, say, 30) it becomes hard to keep track of what you own. What’s more, winning stocks will have only a limited impact on your portfolio.

5. Selling winners too early: Brokers like saying that ‘no one ever went broke taking profits’. But the fact is, most successful investors have a few outstanding winners that more than make up for losses from stocks that didn’t work out. Selling your winners eventually leaves you with a portfolio of losers.

6. Holding losers too long: No matter how carefully you choose your stocks, some will fail to live up to their potential. After giving them enough time, you should sell your losers. This will free up cash to invest in better stocks. Also, you can use any losses outside of tax-deferred accounts to offset gains and reduce or eliminate any capital gains taxes.

7. Reaching for yield: One wag said: “More money has been lost reaching for yield than from the barrel of a gun.” When stocks sport very high dividend yields, it’s usually because the market sees the dividends as being unsustainable. If the company does cut its dividend, then income-seeking investors can lose money. Similarly, prior to the financial crisis of 2008 and 2009, investors seeking higher yields bought non-bank ABCP (Asset-Backed Commercial Paper). When the market for these investments froze, investors could not sell or could sell only at a steep loss.

8. Moving down the quality scale: High-quality stocks tend to grow over time. Low-quality stocks, by contrast, can go broke more easily, be ‘zombie’ stocks, or be out-and-out scams.

9. Failing to emphasize dividends: They encourage patience, can account for a large percentage of your returns and keep you out of the market’s worst mistakes. Growing dividends supported by improving earnings greatly increase your chances of profiting from share price gains over time.

10. Timing the market: Some hope to buy at the bottom and sell at the top. But very few investors master these skills. It’s your time in the market that pays. Bernard Baruch observed: “Some people boast of selling at the top of the market and buying at the bottom. I don’t believe this can be done except by a latter-day Munchausen.”

12. Short-Termism: Paying too much attention to short-term ‘noise’ can lead you to stray from a carefully thought out investment plan and make unwise investment decisions.

13. Acting on tips: Including Internet blogs and TV.

14. Inattention: Not having a one-page summary can lead to missed opportunities or outright losses.

This is an edited version of an article that was originally published for subscribers in the September 28, 2018, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.